Freddie Mac 2014 Annual Report Download - page 137

132 Freddie Mac
one business day of the daily market value calculation. See “RISK MANAGEMENT — Credit Risk Overview — Institutional
Credit Risk Profile — Derivative Counterparties” for a discussion of our counterparty credit risk.
See “NOTE 16: FAIR VALUE DISCLOSURES — Valuation Techniques for Assets and Liabilities Measured on Our
Consolidated Balance Sheets at Fair Value” for additional information regarding the valuation of our assets and liabilities.
Valuation Processes and Controls over Fair Value Measurement
We designed our control processes so that: (a) our fair value measurements are appropriate and reliable; (b) fair value
measurements are based on observable inputs where possible; and (c) our valuation approaches are consistently applied and the
assumptions and inputs are reasonable. Our control processes provide a framework for segregation of duties and oversight of
our fair value methodologies, techniques, validation procedures, and results.
See “NOTE 16: FAIR VALUE DISCLOSURES — Valuation Processes and Controls Over Fair Value Measurement” for
additional information.
OFF-BALANCE SHEET ARRANGEMENTS
We enter into certain business arrangements that are not recorded on our consolidated balance sheets or that may be
recorded in amounts that differ from the full contract or notional amount of the transaction and that may expose us to potential
losses in excess of the amounts recorded on our consolidated balance sheets. See “NOTE 2: CONSERVATORSHIP AND
RELATED MATTERS — Housing Finance Agency Initiative” and “NOTE 14: FINANCIAL GUARANTEES” for more
information on our off-balance sheet securitization activities and other guarantee commitments.
Securitization Activities and Other Guarantee Commitments
We have certain off-balance sheet arrangements related to our securitization activities involving guaranteed mortgages
and mortgage-related securities, though most of our securitization activities are on-balance sheet. Our off-balance sheet
arrangements related to these securitization activities primarily consist of: (a) Freddie Mac mortgage-related securities backed
by multifamily loans (e.g., K Certificates); and (b) certain single-family Other Guarantee Transactions. We also have off-
balance sheet arrangements related to other guarantee commitments, including long-term standby commitments and liquidity
guarantees.
We guarantee the payment of principal and interest on non-consolidated Freddie Mac guaranteed mortgage-related
securities we issue and on mortgage loans covered by our other guarantee commitments. Our maximum potential off-balance
sheet exposure to credit losses relating to these guarantees is primarily represented by the UPB of the underlying loans and
securities, which was $113.7 billion and $101.0 billion at December 31, 2014 and 2013, respectively.
As part of the guarantee arrangements pertaining to certain multifamily housing revenue bonds and securities backed by
multifamily housing revenue bonds, we provided commitments to advance funds, commonly referred to as “liquidity
guarantees,” which were $9.6 billion and $10.0 billion at December 31, 2014 and 2013, respectively. These guarantees require
us to advance funds to third parties that enable them to repurchase tendered bonds or securities that are unable to be
remarketed. In addition, as part of the HFA initiative, we, together with Fannie Mae, provide liquidity guarantees for certain
variable-rate single-family and multifamily housing revenue bonds, under which Freddie Mac generally is obligated to
purchase 50% of any tendered bonds that cannot be remarketed within five business days. At both December 31, 2014 and
2013, there were no liquidity guarantee advances outstanding.
Our exposure to losses on the transactions described above would be partially mitigated by the recovery we would
receive through exercising our rights to the collateral backing the underlying loans and the available credit enhancements,
which may include recourse and primary mortgage insurance with third parties. In addition, we provide for incurred losses each
period on these guarantees within our provision for credit losses.
Other Agreements
We own interests in numerous entities that are considered to be VIEs for which we are not the primary beneficiary and
which we do not consolidate in accordance with the accounting guidance for the consolidation of VIEs. These VIEs relate
primarily to our investment activity in mortgage-related assets and non-mortgage assets, and include LIHTC partnerships and
certain Other Guarantee Transactions. Our consolidated balance sheets reflect only our investment in the VIEs, rather than the
full amount of the VIEs’ assets and liabilities. See “NOTE 3: VARIABLE INTEREST ENTITIES” for additional information
related to our variable interests in these VIEs.
As part of our credit guarantee business, we routinely enter into forward purchase and sale commitments for mortgage
loans and mortgage-related securities. Some of these commitments are accounted for as derivatives. Their fair values are
reported as either derivative assets, net or derivative liabilities, net on our consolidated balance sheets. For more information,
see “RISK MANAGEMENT — Institutional Credit Risk Profile — Derivative Counterparties.” We also enter into purchase
commitments primarily related to future guarantor swap transactions for single-family loans, and, to a lesser extent,
commitments to purchase or guarantee multifamily mortgage loans. These non-derivative commitments totaled $271.2 billion
and $289.7 billion in notional value at December 31, 2014 and 2013, respectively.
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